In re Khabushani

Case Type:
Case Status:
20-1243 (9th Circuit, Jun 22,2021) Not Published
In this one of two related opinions, the Bankruptcy Appellate Panel of the Ninth Circuit (BAP) reversed the decision of the U.S. Bankruptcy Court for the Central District of California (BC) to grant relief from the automatic stay to a certain creditor to file a motion to amend a state court judgment to add (and enforce against) a post-petition entity as a judgment debtor. Because Maziyar J. Khabushani (DR) has received his § 727 discharge by then, the BAP explained, the stay had terminated, the matter mooted. The BC thus abused its discretion by granting relief from a nonexistent stay.
Procedural context:
Before the BC had granted a Chapter 7 discharge to the DR, but after the CR had won prior relief to petition the state court to confirm her prepetition arbitration award (Award) granted to the CR for wrongful termination against the DR, Kiley T. Anderson (CR) tendered a motion for relief (Motion) from the automatic stay to empower her: (1) to file a motion to amend the state court judgment memorializing the Award to add Dreamcrzy Studios LLC (Dreamcrzy), a post-petition entity created by the DR, as an additional judgment debtor pursuant to section 1873 of the California Code of Civil Procedure; and (2) to enforce that state court judgment against Dreamcrzy. (As this state statute has been construed, judgments may always “be amended to add additional judgment debtors on the ground that a person or entity is the alter ego of the original judgment debtor.”) Within the Motion, the CR emphasized the limits of her request: any relief for her would not disturb the stay’s effect with respect to any enforcement action against any property of the DR’s bankruptcy estate or as to other collection action against him. In opposing the Motion, the DR did not focus on jurisdiction but rather made two different arguments. First, he disputed that Dreamcrzy was his alter ego or otherwise liable for payment of the Award. Second, even if Dreamcrzy was his alter ego, he characterized Dreamcrzy as his equivalent. As such, the CR was essentially seeking an improper enforcement of the judgment against him and his post-petition assets. It was then that sequencing became important. At the first hearing on stay relief, the BC added a wrinkle: if the CR prevailed on her claim for a § 523(a)(6) exemption for the Award, it grant the Motion. Subsequently—and before any further hearing on the stay relief motion and summary judgment motion as to this exemption—the BC entered an order granting a § 727 discharge to the DR. At the hearing that followed, the BC awarded summary judgment to the CR on her § 523(a)(6) claim and granted the Motion.
The enmity had emerged, with a vengeance, prepetition. Long before he ever filed, the DR was the sole officer, director, and shareholder of M+V, a marketing and advertising company. He employed the CR, first as a temporary employee, then as an independent contractor, and finally as an M+V employee with full benefits. Five days later of this move, the CR announced her pregnancy and requested a maternity leave commencing in May of 2018; the DR terminated her twenty-five days later. The R promptly commenced arbitration proceedings against the DR and M+V. Eventually, the CR had obtained a final arbitration award (Award) against the DR finding him jointly and severally liable for her wrongful termination. Two weeks later, the matter was dragged into the arms of the BC. It began, as all voluntary chapter 7 cases must, when the DR filed a petition for relief pursuant to this Code corpus. The CR timely filed a § 523(a)(6) complaint seeking an exemption for the award. While that pleading’s adjudication was pending, the CR obtained relief from the automatic stay and converted the Award to a final judgment in state court. After the period to appeal the state court judgment expired, the CR filed a motion for summary judgment on her § 523(a)(6) claim based on the preclusive effect of the arbitrator’s findings and the final state court judgment and the Motion.
Laura S. Taylor; Robert J. Faris; and William Lafferty

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